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Economics of Defense

The Problem with 4%

As the U.S. presidential debates approach, some familiar budgetary figures will re-emerge in the public consciousness. One of these is the common expression of military spending as a percentage of Gross Domestic Product (GDP). For nearly 30 years this figure has hovered within a point or two of the 4% mark (usually much closer), regardless of revenue fluctuations or military spending trends elsewhere in the world. Think tanks are fixated on this linkage, devoting multipleeditorials to the topic. But is defense spending as a percentage of GDP a good metric to use as an immutable “standard”? There are multiple reasons to suggest that this reductionism is a bad idea.

The first problem with the GDP-Defense link is that GDP provides a deceptively simple glimpse into actual outlays. Why? The seemingly straightforward figure-the almighty 4%-actually fluctuates significantly when expressed in normalized dollars spent. This chart helps to portray the divergence:

Note the green line. Since 1988, it has veered fairly widely despite the relative stability of the GDP percentage (blue line). Immediately we can see that the perceived stability of 4% is an illusion when considering the actual expenditures going out the door. The difference is attributable to the size of the overall economy, a moving figure. After all, 4% GDP of a hypothetical “boom” year for the U.S. economy will be greater than a “bust” year the next. Thus, using 4% as a reference point across multiple years is an imprecise technique at best. Here is GDP size since the 1960s for reference. It is quite easy to see how different the value of 4% would be across this period of time!

Second, the external security environment is glossed over when we default to a 4% barometer. The so-called “peace dividend” at the end of the Cold War is one such example of a sea change in the external environment that led to a reevaluation of national priorities. Defense spending was seen as a more fungible at the time given the collapse of the lone external great power threat, bringing about a 2.2% reduction as a percentage of GDP, the last “major” move. One external event that resulted in virtually no reconsideration, meanwhile, is NATO’s commitment to spend at least 2% per country on defense (admittedly falling well short of the target at present).

Looking forward, an external threat could emerge requiring increased commitments to defense materiel and manpower. Alternatively, a replay of the 2008 global financial crisis could constrain resources while driving stimulus spending outside of defense. Each of these scenarios would change the interplay of U.S. security needs and the resources necessary to execute it. Meanwhile, the 4% benchmark would prove a drawback in two ways: by ignoring the volatility in the environment while serving as a political football that could constrain hard choices.

In a related area, the final problem with the 4% link is the inertia that it breeds. Robert Mihara wrote a thought provoking critique in the always great Infinity Journal about the Army’s threat based planning and resourcing model, offering a “value based” proposition based on the auto industry as a feasible alternative. As Mihara states:

“The Army’s strategic planners must not only capture the unique contribution of the Army vis-à-vis its sister services, but the planners must also evaluate the Army’s contribution to the national interest against those of civilian governmental and non-governmental organizations. It is here that the articulation of the Army’s relative value brings its leaders back to properly consider the opportunity costs their nation ought to pay in exchange for the kind of security uniquely obtained through Army landpower.”

Mihara’s argument can be applied a step above the service level as well. Shouldn’t DoD be more in the habit of continually reevaluating its value proposition for the nation in relation to the other slate of agencies, departments, and even NGOs or businesses operating in its sphere of influence?

To be clear, this is not meant as an endorsement of DoD budget increases or decreases, rather a challenge to avoid the kind of prescriptive, status quo thinking that a “4% mentality” inevitably creates. Granted, any DoD budget request outside of this now-standard 4% norm would require a significant messaging effort and intragovernmental approach, but the nation should expect no less than a serious, continual reevaluation of one of its most trusted-and best resourced-governmental agencies.

The views expressed in this blog post are those of the author and do not reflect the official policy or position of the Department of the Army, Department of Defense, or the U.S. Government.

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One comment

Matt
· August 28, 2016

Do you think that the informal (but apparently politically important) marriage of DOD spending to 4% of GDP is indicative of laziness all around? Or is it perhaps valuable as a hedge against competing potential futures? Meaning, as long as the spending is somewhere around that benchmark that the DOD will be well positioned against future security threats OR well positioned against “lean years” ahead. I guess the question is whether or not someone smart has actually made a valuable connection between the number and the outlay or is it simply a trend that has become entrenched business as usual inside the beltway?